THE Bank of England was today given more room to cut interest rates next month as inflation fell back from a two-year high....

THE Bank of England was today given more room to cut interest rates next month as inflation fell back from a two-year high.

Figures from the Office For National Statistics showed the underlying rate of inflation, which excludes mortgage interest payments, dropped 0.3% to 2.3% in September.

The fall, in line with City expectations, was mainly down to lower motoring costs.

Petrol prices fell last month compared to sharp rises on the forecourt in September last year when the fuel crisis hit the UK and crude oil prices were reaching their highest level for 10 years.

The ONS added, however, that the cost of clothing, seasonal food, foreign holidays and theatre tickets all rose by less than last year in September.

It was too early to gauge whether prices for foreign holidays had been affected by the terror attack on the US, the ONS said.

The annual increase in the cost of tobacco and alcohol was the lowest since January 1988, the figures showed.

The underlying rate of inflation is used by the Bank of England's Monetary Policy Committee when setting interest rates and today's fall from 2.6% in August - the highest level since March 1999 - will fuel calls from business leaders for a further cut in the cost of borrowing next month.

Some members of the nine-strong MPC have voiced concerns that another cut could push inflation above the Chancellor's 2.5% target.

The key is now likely to be retail sales figures due out on Thursday which will show how the atrocities of September 11 affected consumers on the high street.

August's interest rate cut contributed to a drop in the headline rate of inflation, which includes mortgage interest payments, last month.

The headline rate dropped to 1.7% from 2.1% in August as the average mortgage interest rate fell by 0.15%.